A Piece Of The Puzzle Missing From Orascom Construction PLC's (ADX:ORAS) Share Price

Orascom Construction PLC's (ADX:ORAS) price-to-earnings (or "P/E") ratio of 6.6x might make it look like a buy right now compared to the market in the United Arab Emirates, where around half of the companies have P/E ratios above 12x and even P/E's above 17x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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The earnings growth achieved at Orascom Construction over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for Orascom Construction

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Orascom Construction will help you shine a light on its historical performance.

How Is Orascom Construction's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Orascom Construction's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 26% gain to the company's bottom line. The latest three year period has also seen an excellent 83% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.8% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that Orascom Construction's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Orascom Construction's P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Orascom Construction currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Plus, you should also learn about this 1 warning sign we've spotted with Orascom Construction.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.